Friday, January 30, 2015

Market Week Wrap-up

There was a sense of wariness in global markets this week as participants moved
beyond ECB easing to mull over the Greek government turnover, some upsetting
corporate quarterly reports, and the Fed's steady course toward rate hikes.
Syriza's victory in Greece was widely expected, and focus is now on how Athens
and the Eurozone can work out a new deal that allows both sides to save face.
The FOMC decision on Wednesday strongly suggested that the Fed is on track for
rate liftoff later this year after upgrading its growth assessment to
"solid" from "moderate", though it did acknowledge that
"international developments" are being watched closely. Meanwhile,
corporate giants like Microsoft, Caterpillar, and ConocoPhillips saw losses as
they grappled with the strong dollar and weak oil prices. The US 10-year yield
fell to new 2015 lows below 1.70%, levels not seen since 2012. The first look
at US fourth quarter GDP was good, not great (+2.6% versus final Q3 +5.0%),
although consumption remained strong. US durable goods orders were not pretty,
while in China, December industrial production contracted 8%, twice the
November decline. The Shanghai Composite lost ground on the week for the first
time in nearly three months, while the DJIA fell 2.8%, the S&P500 declined
2.8% and the Nasdaq lost 2.6%.

In Greece, the anti-bailout Syriza swept into power in elections last Sunday
with an overwhelming 10-point lead over the ruling New Democracy party. Syriza
took 149 seats, just shy of the 151 required for an outright majority,
requiring it to recruit the right-wing, anti-bailout Independent Greeks party
(with 13 seats) as coalition partner. Syriza's mercurial leader Alexis Tsipras
said the election marks the end of bailout agreement for Greece and cancels
austerity. The new government immediately began preparing to cancel certain
privatization deals and met with EU Commissioner Dijsselbloem to discuss a new
deal with Europe. The euro sank on the news, with EUR/USD touching 1.1100,
although it rebounded toward the 1.13 handle later in the week.

Central bank calibration continued this week. The Singapore Central Bank (MAS)
joined the currency wars with an intermeeting policy easing on Thursday. In the
first unscheduled announcement in 13 years, the MAS cut its 2015 headline CPI
forecasts while also lowering the slope of SGD policy band, sending the
currency to its weakest levels since 2010. The Reserve Bank of New Zealand
adopted a more cautious stance, tightening bias and also introduced the possibility
of a rate cut as its next policy move. In Europe, the Danish Central Bank cut
its CD rate for the third time in two weeks, to -0.50% from -0.35%, as the
Danes struggle to maintain the EUR/DKK peg. Analysts say the DKK trading band
could be widened soon if the pressure on the euro continues. Finally, the
Russian Central bank took its one-week auction rate down to 15% from 17%, in
what analysts called a highly political decision.

On Monday, OPEC Secretary General El-Badri tried to call a bottom in oil and
insisted that prices would begin rising soon, with $200/bbl prices possible in
three or four years if new oil investment really started falling. El-Badri
insisted that Saudi policy under the new king would remain the same. The oil
industry seemed to heed El-Badri's words as a number of the major E&P firms
announced sharp y/y reductions in 2015 capex in their earnings reports. The
closely watched Baker Hughes rig count registered another steep decline. The US
rig count dropped 5.5% on the week, and that combined with a report of ISIS
launching a fresh attack in Kurdish territory sent crude futures higher into
the close on Friday. After grinding lower for most of the week, WTI crude
futures rang up an 8% gain into the close on Friday, topping $48/bbl.

Oil majors detailed the impact from the decline in crude over final quarter of
2014 in quarterly reports. Shell, Total, Conoco and Chevron all announced
double-digit percentage cuts to their 2015 capex plans versus 2014 (the
standouts were Conoco cutting about 20% and Total cutting by 30%). Independent
E&P firms Hess and Occidental Petroleum also cut capex levels (Occidental
cut by 33%). The majors saw their upstream earnings plummet, while downstream
earnings are barely helping them keep up. Shares of CVX, COP and XOM fell 4-5%
on the week, while HES was off 8%. Meanwhile refiners Valero and Phillips 66
saw solid gains in profit from lower crude costs, and modest share gains this
week.

Solid earnings reports from DR Horton and Pulte Homes helped drive gains for
the major US homebuilders. Housing data out this week wasn't stellar: pending
home sales dropped more than expected in December, however the month's total
was still higher than the year-ago figure. Meanwhile the November S&P/Case
Shiller index gained 4.3% y/y, the slowest in two years, indicating that lean
inventories and tight lending standards have limited housing activities. Both
Pultle and DR Horton said they were looking forward to a strong spring selling
season.

Apple set a record for the most profits in a quarter ever reported by a public
company with its first quarter results. iPhone shipments hit a new record high,
at 74.5 million units as Apple's new large format phones were a hit, especially
in China. Revenue absolutely crushed expectations on the strong sales of the
high margin iPhone 6 and 6 plus. Investors did not react well to Microsoft's
results, as net income contracted due to price cuts among its Windows and Xbox
businesses. Facebook saw healthy y/y gains in both EPS and revenue, while
mobile users were up 34% y/y.

Alibaba's shares peaked in early November and have been on the wane since, and
this week's fourth-quarter report sent shares down close to 10% after revenue
missed estimates. Some analysts cut the name, warning about revenue growth,
while others doubled down on optimistic buy ratings. Meanwhile Yahoo disclosed
its plan to spin off all of its Alibaba holdings to its shareholders, seen as a
positive development, but the swoon in BABA shares dragged YHOO down right
along with it. Yahoo's flat fourth-quarter search revenue and sinking display
revenue did not help. Amazon had a very good holiday quarter, reporting margins
back in the black and earnings way ahead of expectations. Shares of AMZN rose
more than 10% after its report.

Dollar strength is becoming a big headache for US corporations with significant
overseas revenue, including consumer and drug companies. Both Lilly and Pfizer
turned in decent fourth-quarter results, and both cited big FX impacts for some
less-than-impressive full-year guidance. Colgate-Palmolive and Proctor &
Gamble both missed revenue targets and warned FX was becoming a problem.
P&G said FX would reduce 2015 sales by 5% and net earnings by 12%, while
Colgate said FX cut 9% off revenue in its fourth quarter.

China reported more troubling data this week. December industrial profits
declined twice the amount seen in November, -8% versus -4.2% m/m, and 2014
industrial profit growth was just 3.3%. Officials acknowledged the downward
pressure on the economy, but also said this is the "new normal." The
PBoC injected liquidity for a second week in a row, again citing the
anticipated cash squeeze going into the Lunar New Year holiday.

Lower oil prices showed up in Japan's CPI data. December core nationwide CPI
and January Tokyo CPI declined to 9- and 10-month lows, respectively.
Meanwhile, Japan is approaching the consumption tax hike roll-off in April,
which could send annual CPI levels back to negative territory and leave
Abenomics even further from its key objective of 2% inflation. Other December
datapoints were similarly troubling: household consumption fell y/y for the
ninth straight month and industrial output missed consensus, although exports
stayed strong, rising 12.9% y/y. None of this stopped the cabinet from
maintaining its economic assessment of "gradually recovering" for the
fourth consecutive month. USD/JPY bounced around in a range between 117.40 and
118.60.